Auditing-Chapter 12

Observation

During a site visit to a construction site, the auditor determined that all employees were wearing proper safety equipment.

Completeness and cutoff

Recorded inventory quantities included all products on hand.

Recalculation

The accounting firm's computer assisted audit specialist obtained an electronic inventory file from the company and checked the accuracy of the extensions and footings.

Reperformance

The auditor obtained a purchase order from the purchase order file and compared it to the authorized supplier list to determine that the related goods had been purchased from an approved supplier.

Bill of lading.

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of transportation agreement is the:

Rights and obligations

The entity has legal title to inventories.

Presentation and disclosure

The major categories of inventories and their basis of valuation are adequately reported in the financial statements.

Obtain direct knowledge that the inventory exists and has been properly counted.

The primary objective of a CPA's observation of a client's physical inventory count is to:

Preparation of a shipping document.

The receiving department in least likely to be responsible for the:

Want the client to schedule the physical inventory count at the end of the year.

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably:

Establish that the client includes only inventory on hand at year-end in inventory totals.

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold?

Inspection of tangible assets

During the physical inventory count, the auditor asked the client to open various boxes of inventory items so she was able to assess the quality of the item.

Well-kept records of perpetual inventory are maintained.

Instead of taking physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and:

Valuation and accuracy

Inventories are reduced, when appropriate, to replacement cost or net realizable value.

Can issue an unqualified opinion without disclosing that she did not observe year-end inventories.

McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examinations, Mullins:

Inquiry

The auditor asked the warehouse manager about whether certain inventory items were becoming obsolete.

Analytical procedure

The auditor calculated the accounts receivable turnover for the year.

Inspection of records or documents

The auditor obtained a copy of the company's accounting manual and read the section on inventory to prepare for the physical inventory observation.

Existence.

When primary risk related to an audit is possible overstated inventory, the assertion most directly related is:

Observe merchandise and raw materials during the client's physical inventory taking.

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory?

Valuation and accuracy

Cost of inventories is properly calculated.